Every investor will fall into one of 3 investment stages. There are no concrete rules to follow for each stage that you are in, but different strategies and general guidelines that you can follow depending on where you currently are in your investing lifecycle. The first thing we should all do as market participants is to identify which of the investment stages we are in; then, we can begin to put a game plan in place.
The 3 Stages of your investment life are:
- ACCUMULATION
- DECUMULATION
- LEGACY
ACCUMULATION:
This is the first stage we all enter. Accumulation begins from the day you invest your first dollar until the day you retire. In this stage, you are building wealth by accumulating investable assets. This will be through contributions into your 401K, Qualified retirement accounts, and taxable accounts as excess savings build up for you.
Someone in the accumulation stage should always have a long-term outlook. Never get too excited when markets go up; or upset when they go down. When accumulating assets, a down market can be your best friend. The reality is that since 1921 the Dow Jones has been higher after any 10-year period over 95% of the time and 100% of the time after any 20-year period. Focus on dollar-cost-averaging into the market as “TIME” is on your side.
DECUMULATION:
The second stage you will eventually enter is the decumulation stage. This stage hopefully lasts as long as the accumulation stage did. At this stage, more planning needs to occur than in the previous one. Decumulation is when you retire and are now living off your investment accounts. This is usually when social security and pensions kick in. Your investment accounts will be there to bridge the gap and ensure you have enough money to maintain your lifestyle.
The key in this stage is to have a financial plan, and STICK TO THAT PLAN! Most people will stay invested during this stage and should plan to withdraw a small percentage of their accounts every year. There are a lot of different strategies you can use when it comes to withdrawing from your accounts, and a good financial advisor can help you enter the decumulation stage with confidence.
LEGACY:
Legacy is the stage we don’t like to talk about or even think about. This is how you will strategically leave your money to your heirs. If done correctly, you should plan to have your money outlive you. Planning for the legacy stage will occur will you are still in the decumulation stage. There is a big difference between leaving your kids with tax-free money or you using tax-free money to live in retirement. No right or wrong decision…
Like all stages, there is no one size fits all approach or definite rules to follow. You should only figure out what makes sense to you and then plan accordingly. From having your beneficiaries in place to possibly setting up a will and trust or making charitable distributions, the Legacy stage is crucial for us all. So, it may sound like the Legacy stage of your investing lifecycle will be carried out after you pass on… This is true, but all the planning takes place while you are still alive, and at this time, bringing on an estate attorney to consult with is smart. Your financial advisor can work with them to ensure that your long-term planning is in place. No one wants their heirs to scramble around trying to figure out their financial affairs after they pass on.
The first step is to ask what stage you are in; and how close you might be to the next stage? One last thing to point out is that you should be planning for each of these stages before you actually enter it. We all want to control our money as much as possible and identifying where we are in the investment lifecycle will allow us to think and act accordingly.